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Impact of Brexit on Retailers

By Sarah Wright, Olswang

With the UK voting unexpectedly to leave the European Union, retailers operating in the UK face a period of unprecedented commercial and legal uncertainty. We set out ten things retailers should be considering as a result of the changing political landscape.

1. The Brexit options

Brexit covers a multitude of possibilities. Broadly they comprise (a) joining the EEA which would allow the UK to access the single market but mean that it will still be subject to the majority of European law; (b) joining EFTA, which provides more limited access to the single market but means that fewer European laws have to be adopted; or (c) joining neither but perhaps a bespoke trade deal with the EU which would allow, in which case the access to the single market and the laws to be adopted could be a matter for almost limitless negotiation. The impacts of these options would potentially have very different effects on retailers. To determine how a Brexit will affect your retail business in the long term, it will be necessary to monitor closely the direction of travel towards these options.

The UK is likely in theory to remain a full Member of the EU for at least the next two years, as provided for under Article 50 of the Lisbon Treaty and in reality the process to complete independence is likely to take much longer than that. However, despite this being the clear legal position, the political reality may be somewhat different, for example in relation to the extent the European Commission is prepared during the Brexit process to engage with UK issues.

2. The immediate business and investment environment and currency shock

The most significant likely immediate consequence of a Brexit vote will be a retrenchment in business confidence and a recession. No-one knows how deep this will be or how long it will last (or indeed if there will be one at all), but given the consistent predictions of such a downturn, it may become something of a self-fulfilling prophecy. Accordingly, retailers would be prudent to consider the usual steps they take on a downturn, for example identifying their potentially vulnerable contractual counter parties and considering contingency planning.

Even if there is no significant downturn, the investment environment is likely to change significantly. Retailers looking for investment should consider whether the usual sources remain open to them or whether alternative funding may be required.

3. Contractual issues

In our experience, few contracts have any contingent provision regarding Brexit. However, all manner of complex legal issues could arise from contracts which have been written on the assumption that the UK will remain in the EU. For example, there may be provisions which assume a prevailing European law. Also the ensuing economic and investment conditions may have consequences for the performance of contractual obligations. Retailers may want to undertake a triage of their contracts with third parties to assess whether any issues arise resulting from the Brexit vote.

4. Outstanding European litigation

European law is likely to remain part of our domestic law for at least the next two years. For that reason, there is no obvious reason why litigation which involves issues of European law should be withdrawn. However, where there are esoteric points of purely European law, there may be less readiness on the part of litigators and courts for great resources to be expended on determining these given that the shelf life of the relevance of these issues may be limited. Equally, where there is a case with an outstanding reference from a UK court to the Court of Justice of the European Union, in theory whilst the UK remains a Member State of the EU, there is a right for these cases to be heard and the matter to be resolved. However, whether in reality it is considered worthwhile is another matter.

5. Data protection laws after Brexit

One area of onerous European law is data protection. That was due to become even more onerous with the General Data Protection Regulation scheduled to come into force in May 2018. The Brexit vote is likely to offer little respite. If the UK remains in the EEA, since data protection law is comprised within the four freedoms, the UK will have to adopt the Regulation as if it were in the EU. But even if the UK adopts a different route, if it wants to be able to collect and use data from EU consumers and be given safe harbour designation so that data transfers are permitted from EU consumers to UK retailers, it is likely that it will in any event have to adopt data protection laws broadly akin to the Regulation. Accordingly, we believe that the process of readying retailers for the new EU Regulation should proceed.

6. Intellectual property law after Brexit

There will be no immediate impact, but once the UK exits the EU the availability of IP rights covering the UK will change. Following a Brexit, the UK will no longer be part of the EU Trade Mark regime, which is available only to EU Member States. Existing EUTM registrations would cease to apply in the UK, although it is likely that transitional provisions would be put in place to allow brand owners to convert part of their EUTMs to national UK registrations (possibly retaining their original priority dates). In the same way, Registered Community Designs which some retailers use to protect the design of products as well as shop fitouts would cease to apply in the UK (subject to transitional arrangements) and new RCD filings would no longer cover the UK. Brand owners may wish to consider supplementing their portfolios now with UK national applications for their core brands and designs.

7. Employment law after Brexit

If, as is widely anticipated, Brexit does lead to a recession and the departure of international businesses from the UK, workers will inevitably be affected, and we may see a return to the mass redundancy programmes of the late noughties, as well as an increase in Employment Tribunal claims. In the short term, workers’ legal rights are unlikely to be affected, certainly over the next two years. However, in the longer term, the Government, and particularly a Conservative Government, may be tempted to water down or even repeal some secondary UK employment legislation introduced pursuant to the European Communities Act, such as the Working Time Regulations 1998.

It is however highly probable that some things won’t change. For example, anti-discrimination legislation is so fundamentally engrained in British culture that any significant amendments to it (other than to extend its reach) would almost certainly be met with resistance from the general public and voters. In addition, family-friendly rights such as the right to maternity and parental leave and pay are unlikely to be altered dramatically given the social policy behind their introduction.

8. Tax considerations

If it becomes apparent that we are facing a recession in the UK, then all eyes will be on the next budget and there have been suggestions that an emergency budget may be required in order to raise taxes.

Whilst the vast majority of our taxes are domestic ones, VAT is imposed under EU Directives. The most likely ultimate result of the Brexit vote on VAT will be to replace the current system with a purely domestic one, with supplies between the UK and Member States the obvious area of change. However, since recent changes to VAT have made it increasingly a point of consumption tax (such that supplies are taxed in the jurisdiction of receipt) a move to a domestic system of UK VAT could – for many supplies – look very similar to the pan-EU system we have today.

In the longer term, it will be interesting to see how our tax legislation, which has been designed to comply with EU law in many areas, will develop. For example, being released from the shackles of state aid rules, should allow tax incentives to be designed in a more targeted way to assist specific sectors.

CONTACT

For more information on the likely effects of the Brexit vote on Retailers, please speak to: